M/S. G R Capital & Finance Private ... vs Sebi
- CitationAppeal No. 470 of 2023
Ratio decidendi
The rule this decision rests on
Where the regulator, having had the material on which a charge rests and having deliberately omitted that charge from an earlier show cause notice in the same proceedings, later initiates proceedings on that omitted charge, the regulator is estopped from pursuing it. Where no period of limitation is prescribed by the statute or regulations for issuing a show cause notice or completing adjudication, the power must nonetheless be exercised within a reasonable time; what is reasonable depends on the facts and circumstances of each case, including the nature of the default and statute, any prejudice caused, and whether third-party rights have arisen. Where the regulator had knowledge of the alleged violation through a forensic report and issued the show cause notice only years later without plausible explanation, the delay is inordinate and the resulting penalty order cannot be sustained on that ground alone.
Written by Miss Lucy from the judgment below, not taken from a headnote.
Judgment
As delivered
Date of Decision: 14.06.2023
Misc. Application No. 459 of 2023 And Appeal No. 470 of 2023
1.
M/s. G R Capital & Finance Private Limited Flat No. 5B, Vishesh CHS Ltd., 2nd Floor, 252, Sion Main Road, Sion West, Mumbai- 400 022
2. Gopal Ramourti 501, Lalita Sadan, Old Patkar Blocks, Off. S V Road, Bandra West, Mumbai- 400 050
3. Gopal Ramourti HUF 501, Lalita Sadan, Old Patkar Blocks, Off. S V Road, Bandra West, Mumbai- 400 050
4. Borachem Industries Limited Himalaya Estate, 16A Shivaji Nagar, Pune- 411 005 ...Appellants
Versus
Securities and Exchange Board of India, SEBI Bhavan, Plot No. C-4A, G-Block, Bandra-Kurla Complex, Bandra (East), Mumbai- 400 051 ...Respondent
Mr. Harsh Kesharia, Advocate with Mr. Vikas Bengani, Advocate for the Appellants.
Mr. Vishal Kanade, Advocate with Mr. Pritish Chatterjee and Mr. Aditya Sarangarajan, Advocates i/b Mansukhlal Hiralal & Co. for the Respondent.
2
CORAM: Justice Tarun Agarwala, Presiding Officer Ms. Meera Swarup, Technical Member
Per: Justice Tarun Agarwala, Presiding Officer (Oral)
1. The appellants being noticees no. 1,2,3 & 6 have
challenged the order of the Adjudicating Officer ("AO" for
convenience) of the Securities and Exchange Board of India
("SEBI" for convenience) dated December 29, 2022 imposing a
penalty under Section 15A(b) of the SEBI Act, 1992 for
violation of Regulation 8A(2) & (3) of the SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997
("SAST Regulations" for convenience).
2. The facts leading to the filing of the present appeal is, that
the SEBI received a reference from the Income Tax Department
regarding bogus purchase made by the Company- noticee no. 1
from its sister concerns and inflation of the books and accounts.
SEBI conducted a forensic audit through a Chartered
Accountant who submitted a report on February 27, 2012
finding that various violations of the SEBI (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities
Market) Regulations, 2003 ("PFUTP Regulations" for
convenience) and irregularities with regard to the financials of 3
the Company and non-compliance of the disclosure requirement
as per Regulation 8A(2) & (3) of the SAST Regulations.
3. Based on the aforesaid findings given by the forensic
auditor, proceedings were initiated by the Whole Time Member
("WTM" for convenience) by issuance of a show cause notice
dated June 23, 2016 with regard to financial irregularities and
violations of the PFUTP Regulations. The WTM after
considering the material evidence on record passed an order
dated February 28, 2019 exonerating the appellants of the
charges levelled against them.
4. After the passing of the order of the WTM, the AO issued
a show cause notice dated February 18, 2020 with regard to the
non-disclosure made by the appellants under Regulation
8(A)(2)&(3) of the SAST Regulations relating to transactions
which were executed between the period 16.12.2009 to
15.12.2010. The AO after considering the material evidence on
record has passed an impugned order imposing penalty.
5. We have heard Shri Harsh Kesharia, the learned counsel
for the appellants and Shri Vishal Kanade, the learned counsel
for the Respondent.
4
6. In our view, the entire proceedings initiated by the AO is a
misuse of the process of law. The forensic audit report was
submitted on February 27, 2012 finding financial irregularities,
violations of PFUTP and SAST Regulations. Based on these
findings the WTM issued a show cause notice and consciously
did not include the charge of the SAST violations. By not
including the charge in the show cause notice it would be
deemed that SEBI chose not to pursue this violation and,
consequently, we are of the opinion, that the respondents were
estopped from initiating a show cause notice relating to
violations of the SAST Regulations especially when that
allegation was not included in the earlier show cause notice.
The principle of estoppel will squarely apply in the instant case.
7. Apart from the aforesaid, we find that there is an undue
delay in the initiation of the proceedings for which no plausible
explanation has been given. The transactions is of the period
2009-2010. SEBI came to know about the allegation and
accordingly conducted a forensic audit which report was
submitted on February 27, 2012 and the violation under the
SAST Regulations was indicated in this forensic report. The
show cause notice was issued by the AO on February 18, 2020
after eight years of the submission of the forensic report. 5
Inspite of having knowledge of the alleged violations, no steps
were taken by the respondent to initiate proceedings at the
appropriate time. Consequently, in our view, there has been an
inordinate delay in the initiation of the proceedings and on this
short ground the impugned order cannot be sustained.
8. In Mr. Rakesh Kathotia vs. SEBI in Appeal No. 7 of 2016
decided by this Tribunal on May 27, 2019. This Tribunal held:-
"23. It is no doubt true that no period of limitation is prescribed in the Act or the Regulations for issuance of a show cause notice or for completion of the adjudication proceedings. The Supreme Court in Government of India vs. Citedal Fine Pharmaceuticals, Madras and Others, [AIR (1989) SC 1771] held that in the absence of any period of limitation, the authority is required to exercise its powers within a reasonable period. What would be the reasonable period would depend on the facts of each case and that no hard and fast rule can be laid down in this regard as the determination of this question would depend on the facts of each case. This proposition of law has been consistently reiterated by the Supreme Court in Bhavnagar University v. Palitana Sugar Mill (2004) Vol.12 SCC 670, State of Punjab vs. Bhatinda District Coop. Milk P. Union Ltd (2007) Vol.11 SCC 363 and Joint Collector Ranga Reddy Dist. & Anr. vs. D. 6
Narsing Rao & Ors. (2015) Vol. 3 SCC 695. The Supreme Court recently in the case of Adjudicating Officer, SEBI vs. Bhavesh Pabari (2019) SCC Online SC 294 held:
"There are judgments which hold that when the period of limitation is not prescribed, such power must be exercised within a reasonable time. What would be reasonable time, would depend upon the facts and circumstances of the case, nature of the default/statute, prejudice caused, whether the third-party rights had been created etc."
9. Similar view was held in Ashok Shivlal Rupani & Anr.
vs. SEBI (Appeal No. 417 of 2018 along with other connected
appeals decided on August 22, 2019). Against the order of this
Tribunal in the matter of Ashok Shivlal Rupani, SEBI filed
Civil Appeal No. 8444-8445 of 2019 before the Supreme Court
of India which was dismissed and the order of this Tribunal
affirmed by the Supreme Court.
10. Similar view was again reiterated in the matter of
Ashlesh Gunvantbhai Shah vs SEBI (Appeal No. 169 of 2019)
and other connected appeals decided on January 31, 2020 7
(2020 SCC OnLine SAT 30) where on account of inordinate
delay in the initiation of the proceedings by issuance of the
show cause notice, the penalty order was quashed.
11. In the light of the aforesaid, we are of the opinion that
there has been an inordinate delay in the issuance of the show
cause notice. Even though there is no period of limitation
prescribed in the Act and the Regulations for issuance of a show
cause notice and for completion of the adjudication proceedings,
nonetheless, the authorities are required to exercise its powers
within a reasonable period. In AO, SEBI vs. Bhavesh Pabari,
2019 SCC OnLine SC 294 the Supreme Court held that an
authority is required to exercise its powers within a reasonable
period.
12. For the reasons stated aforesaid, the impugned order in so
far as it relates to the appellants are quashed. The appeal is
allowed. The misc. application is disposed off accordingly.
13. This order will be digitally signed by the Private Secretary
on behalf of the bench and all concerned parties are directed to
act on the digitally signed copy of this order. Certified copy of 8
this order is also available from the Registry on payment of
usual charges.
Justice Tarun Agarwala Presiding Officer
Ms. Meera Swarup Technical Member
14.06.2023 PRERNA Digitally by PRERNA signed
PK MANISH Date:
MANISH KHARE
KHARE 2023.06.14 17:27:57 +05'30'
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